EU Joins IMF in Criticizing Latvian Cuts to Tax, Social Spending

The European Union’s executive arm
joined the International Monetary Fund in criticizing Latvia’s
decision to lower taxes and trim social spending in the bloc’s
most unequal country.

Reductions in income and value-added taxes were carried out
without consultation, the European Commission said in a report
published today on its website. Cuts in minimum benefits for the
Baltic nation’s poorest violated previous accords with the EU
and were implemented with no substantial analysis, it said.

The report is part of a second review since Latvia exited a
7.5 billion-euro ($10 billion) bailout, taken as the economy
shrank by about a fifth in 2008-2009. Gross domestic product has
since rebounded, growing for a ninth quarter between July and
September, while the government has cut the budget gap to as low
as 1.2 percent of output in a bid to adopt the euro in 2014.

The commission’s assessment is “overall positive but also
raises important concerns,” according to the report. “Better
economic and budgetary results, coupled with the end of close
surveillance under the balance-of-payments support, have led to
some complacency, a relaxation of efforts and a lack of
steadfastness of the authorities.”

The cuts in minimum benefits may “maintain an uneven
system with negative impact on benefit coverage and adequacy”
and were implemented with “no substantial prior analysis on the
impact on poverty and incentives to work,” the commission said.

Decisions to reduce benefits and decentralize financing
have been criticized by the IMF, which said social-spending cuts
risk widening the EU’s worst inequality, stoking the fastest
emigration in a decade and denting economic growth.

The economy may have expanded 5 percent last year, better
than an initial 4.3 percent forecast, while the budget deficit
has continued to beat expectations, the commission said.